Opinion

Felix Salmon

Hungary: The Hungarian view

By Felix Salmon
June 7, 2010

Was the Hungary-related market swoon on Friday the result of misguided naivete on the part of investors who really have no idea how to parse statements from Hungarian politicians? Erik D’Amato, in Budapest, certainly thinks so:

In what must be one of the craziest episodes I’ve witnessed in almost 20 years covering financial markets, a global mini-meltdown has been triggered or at least stoked by people listening to – and taking seriously – the ramblings of a few Hungarian politicians…

Asia was still down earlier today, with Hungary cited as a major reason for the selling.

And all because people foolishly assumed that some Hungarian politicians might be telling the truth! …

In this case there was certainly never any reason to believe that what was being said was believed even by the people saying it.

The point here is that the incoming government ran on a platform of fiscal easing: that’s usually a good way of getting elected. And so in order to make the fiscal cuts necessary to remain compliant with EU and IMF conditionality, they had to get very serious very quickly — in public — about the severity of the government’s financial problems.

New to government, they went too far. But there’s a case to be made that the markets should have taken the government’s remarks as good news, since they indicated that everything was going according to plan and that the government was just as serious about fiscal austerity as anybody could hope, and was trying to use scare tactics to sell the need for budget cuts to the populace more generally.

European markets aren’t buying it: they’re trading below their Friday closing levels today, as is the euro. But then again, the whole idea that global markets suddenly cared about Hungary on Friday was always a bit bizarre. They never cared much about Hungary before, and the country isn’t a member of the eurozone, so doesn’t pose the existential risks to the European project that Greece does. Most likely this was just another one of those random triggers which might normally have been easily ignored, but which was simply the excuse that jittery and volatile markets needed to sell off sharply.

These little news bombs can and will come from anywhere: by their nature they’re unpredictable. What’s clear is that markets aren’t robust to them these days. Which raises the question: do you want to “invest” in an asset class which is so prone to panic?

Comments
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It appears to me that every time the Euro has a steep decline, the markets go into panic. The markets may do well to ignore the Euro simply because everyone expects it to go down, which might be a good thing for the European economy.

Besides, there is a rumor that Iran is selling $45 Billion Euros, so really, there is no chance for the Euro to recover unless the European economy improves, plus the European Central banks have to exceed the Iranian dumping with buy backs.

I wish the markets, especially the US markets were a little less prone to panic.

Posted by Jones22 | Report as abusive
 

Selling Euros in exchange for US Dollars would be a news bomb, also a suicide one.

Posted by HBC | Report as abusive
 

The big financial story now is China’s massive wage inflation. See Kedrosky:
http://paul.kedrosky.com/archives/2010/0 6/chinas_wage_inf.html

The whole crisis was that the American consumer ran out of gas and the emerging world couldn’t take the handoff that Mohammed El Erian talks often about. So this would be exactly the medicine needed to cure the present deflationary winds. It is also bullish for western companies that sell to China.

American exporters are in a sweet spot (well not in re Europe but at least in re China). Western companies can hold a very hard line on wages for their employees for years to come while increasing their sales substantially in the world’s largest market. This is the stuff of increased profits, the long-run driver of the stock market.

Note that when companies are very profitable, they can buy their own shares. Demand for stocks need not come only from the public.

The above argument applies mainly to American exporters. Companies driven by domestic demand surely face tougher sledding.

Posted by DanHess | Report as abusive
 

It must be said very importantly that American companies paying American-level wages are among the most efficient in the world.

Consider company American company A and emerging market company E. The cost of manpower for A among the highest in the world. The cost of manpower in E is 30x less. Clearly A is many orders of magnitude more efficient than E.

What is the chance that A can succeed in E’s home turf where wages are 30x less? Excellent.

What is the chance that E can succeed in A’s home turf where wages are 30x higher? Nil, but hell nil.

Consider that the average monthly wage in China is, say, $200. Consider too that an entry-level employee at McDonalds earns say $7 in compensation for 160 hours a month, a total compensation of $1120 a month.

For McDonald’s to duplicate their model in China is trivial. In fact McDonald’s in China should be far more profitable, with the benefit of far lower wages, their biggest cost. Could a Chinese version of McDonalds, which might pay people less than $100 per month succeed here? I can’t see how.

Where is the profusion of Chinese companies landing on our shores?

So under globalization American companies that go international get this massive tailwind. Meanwhile, the American public has this brutal headwind of global wage arbitrage.

Clearly, if the American public wants to hedge its misfortune, it should own American stocks.

Posted by DanHess | Report as abusive
 

“Clearly, if the American public wants to hedge its misfortune, it should own American stocks.”

I don’t see this happening anytime soon with near weekly stock market crashes. If the large fund managers showed some backbone and stopped panic selling every time a European minister sneezes, the US stock market might recover. But all I see in the markets for the foreseeable future is fear and cowardice.

Posted by Jones22 | Report as abusive
 

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